Business Insurance & Federal Anti Trust Regulation
State regulation states that the business of insurance, and every person engaged therein, shall be subject to the laws of the several states that relate to the regulation or taxation of such business.
Federal Regulation states that No Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any state for the purpose of regulating the business of insurance, or which imposes a fee or tax upon such business, unless such Act specifically relates to the business of insurance provided, that after June 30, 1948, the Act of July 2, 1890, as amended, known as the Sherman Act, and the Act of October 15, 1914, as amended, known as the Clayton Act, and the Act of September 26, 1914, known as the Federal Trade Commission Act, as amended, shall be applicable to the business of insurance to the extent that such business organization is not regulated by state law.
Before 1944, insurance rating practices were generally the subject of state regulation. Most state regulation involved some type of administrative approval of rates. These rates were developed almost exclusively by insurers. For example, casualty insurers or groups of casualty insurers proposed premium rates, and these were submitted to the state for approval. Regulatory review varied considerably in the various states. It was generally assumed that there was little need for any strict examination of the premium rates.
In 1944, the United States Supreme Court held that insurance was subject to federal regulation, including anti-trust legislation. However, facing severe doubts about the Supreme Court’s decision, specifically with respect to rating practices and to state regulation, Congress passed the McCarran-Ferguson Act, which preserved the possibility for the individual states to continue to exercise their own responsibility for insurance rate regulation.
The McCarran-Ferguson Act did not return the regulation of insurance rates entirely to the individual states. It merely exempted the insurance industry from federal anti-trust legislation to the extent that the insurance business is actually regulated by state law. Therefore, there was the immediate pressure from the insurance industry for the states to occupy and assume full responsibility for their own insurance regulation, especially in relation to rating. This move was intended to avoid the threat of federal anti-trust regulation.
By 1951, rate regulatory legislation had been enacted in every state. State regulatory statutes are essential in avoiding the application of federal regulation anti-trust laws to the activities of insurers. This is because most insurers act in concert through rating organizations in order to establish premiums. Therefore, the activities of these rating organizations would violate the federal anti-trust legislation, if there were no state regulation.
Methods to Regulate Insurance
Insurance companies in the United States are primarily regulated by the individual states. There is no one federal regulatory agency that specifically oversees insurance companies. The name of the state insurance regulatory agency typically is the “Insurance Department,” “Division of Insurance,” “Insurance Bureau” or something similar. The agencies are typically headed by a state government official usually called the “Commissioner of Insurance,” “Superintendent of Insurance” or “Director of Insurance,” or something similar. In most states that person is appointed by the Governor, although in some states, including California, the “Insurance Commissioner” is an elected office.
Each state assumes primary responsibility for overseeing the financial operations and management of insurance companies that are incorporated in that state. For example, Prudential was incorporated in New Jersey, so that state has a primary role in its regulation, while Metropolitan is incorporated in New York, which has the primary role. (Companies have their “statutory home office” — even though sometimes it is just a mail drop — in the state that incorporated them.) Each state also regulates the local operations of the insurance companies it has licensed to do business within the state, particularly as they relate to policy forms, rates, sales agents and their practices.
To coordinate the regulatory processes for each of the 50 states and the District of Columbia, Puerto Rico and the US Virgin Islands, there is the National Association of Insurance Commissioners, made up of the states’ insurance regulators, who do cooperate (more or less) in developing a common form of financial statement, oversight teams, and model laws that the states’ legislatures then sometimes enact, and model regulations that the regulators sometimes adopt.